Judgment rendered September 23, 2020. Application for rehearing may be filed within the delay allowed by Art. 2166, La. C.C.P.
No. 53,527-CA
COURT OF APPEAL SECOND CIRCUIT STATE OF LOUISIANA
*****
BARBARA McNORTON HOVELL Plaintiff-Appellant
versus
ORIGIN BANK F/K/A Defendant-Appellee COMMUNITY TRUST BANK
Appealed from the Fourth Judicial District Court for the Parish of Ouachita, Louisiana Trial Court No. 2016-2046
Honorable Wilson Rambo, Judge
OFFICE OF DONALD L. KNEIPP Counsel for Appellant, By: Donald L. Kneipp Robert H. Holladay
WOOD LAW FIRM Counsel for Appellee By: R. Douglas Wood, Jr.
HAYES, HARKEY, SMITH, & CASCIO By: Thomas M. Hayes, III
Before WILLIAMS, GARRETT, and THOMPSON, JJ. THOMPSON, J.
This appeal arises from the trial court’s granting of an exception of no
cause of action against a seller of a broadcast radio station by the bank who
provided financing for the buyer. The relatively low threshold consideration
for overcoming an exception of no cause of action is if the petition states a
cause of action on any ground or portion of the demand. Plaintiff has set
forth a potential cause of action in his pleadings, and we therefore reverse
and remand the matter for further proceedings.
SUMMARY
The applicable parties in this matter are the owner/seller of a
broadcast radio station, the buyer, and the bank funding the purchase. The
absence of various security interests inuring to the benefit of a subrogee of
the bank’s position is at the crux of the dispute. When the buyer stopped
making installment payments on the loan, the bank seized a guarantor’s
certificate of deposit (“CD”), which had been pledged as security for the
loan. The seller was ultimately revealed to be the source of the funds for the
CD.
A seller may owner-finance the sale of a radio broadcast station, but
Federal Communication Commission (“FCC”) rules prohibit a seller from
retaining a reversionary interest in the FCC broadcast license.1 A broadcast
license can have significant value and was one of the assets being conveyed
in the present sale. The parties elected for the buyer to obtain a commercial
loan. When the buyer was apparently unable to obtain independent
financing, the seller, using a third party to disguise the actual source of the
1 See 47 C.F.R. § 73.1150. funds, deposited the funds in a CD with the lending bank. The CD was in an
amount equivalent to one hundred percent (100%) of the amount sought to
be borrowed by purchaser. With that collateral, the bank provided the buyer
with financing, the sale concluded, and the buyer began making regular
monthly installments on the loan.
A few years later, the buyer stopped paying the monthly installments
on the loan, and with the loan in arrears, the bank began deducting the
payment amounts from the pledged CD. After subsequent delinquent
payments, the bank seized the entire remaining loan balance due and
returned the balance of the funds in the CD to seller.
The seller, now subrogated to the position of the bank, sought
recovery from the borrower, who was the buyer, of its seized funds and filed
suit against that buyer. During that process, the seller discovered the bank
had not secured a personal guaranty from the buyer, an interest in the FCC
broadcast license, or an interest in the furniture, fixtures, and equipment that
comprised a part of the sale. The seller has alleged that when the bank was
discussing the pledge of the CD with seller’s undisclosed representative, the
bank made verbal promises to obtain additional security, including a
personal guaranty from the buyer and the seller and to file liens against the
assets of the radio station being conveyed. The bank denies those
allegations.
The seller asserts that the bank owed a duty of good faith and fair
dealing in connection with obtaining the additional security, despite there
being no written document to support seller’s claims. The bank asserts that
there is no writing memorializing any agreement to obtain additional
2 security on the loan and that it had no duty to obtain any of the security the
seller alleges was promised to his undisclosed agent. The bank undertook its
usual and customary underwriting in order to determine whether to offer a
loan to the buyer and then obtained the security it deemed appropriate to
support its lending decision.
The seller then filed suit against the bank for the alleged breach of the
duty of good faith and fair dealing, which he asserts resulted in damages.
The bank filed an exception of no cause of action against the seller, and the
trial court granted the exception. The seller now appeals that judgment.
FACTS AND PROCEDURAL HISTORY
On March 4, 2011, Holladay Broadcasting of Louisiana, LLC, owned
and operated by Robert H. Holladay (“Holladay”), sold a radio station to KP
Music Group, LLC (“KP Music”), for $700,000. KP Music financed the
purchase of the radio station through Origin Bank F/K/A Community Trust
Bank (“Origin”) and executed two promissory notes dated March 2, 2011, to
Origin, one for $50,000 in operating capital and the other for the $700,000
purchase price.
Origin required collateral for the notes in favor of KP Music. Original
plaintiff in this action, Barbara McNorton Hovell (“Hovell”), pledged a
certificate of deposit in the amount of $750,000, after replacing another
woman who originally pledged the funds necessary to secure the loan.
Hovell is Holladay’s former mother-in-law. Hovell executed two
assignments of deposit account in favor of Origin dated April 11, 2011,
wherein she assigned a CD worth $750,000 to secure the promissory notes in
favor of KP Music. Holladay alleges that Origin verbally agreed to secure
3 additional collateral for KP Music’s loan, specifically including: 1) a UCC
financing statement on the furniture, fixtures, and equipment belonging to
the radio station owned by KP music, 2) a lien on KP Music’s FCC License,
3) a personal guaranty from Holladay, and 4) a personal guaranty from
Calvin H. Murry (the owner/operator of KP Music). The record contains no
writing that reflects any such assertion by Origin Bank, and neither party has
referred to any such writing.
Approximately four years after the purchase of the radio station and
systematically paying the monthly installments as they came due, KP Music
stopped making monthly payments in 2015. Origin sent Hovell written
notification via certified mail that KP Music had missed a monthly payment
and informed her that the monthly payment had been deducted from her CD,
in accordance with the security agreement. In July 2015, after additional
monthly payments were not made by KP Music, Hovell was notified that
Origin had seized and liquidated the CD to satisfy the balance of KP Music’s
loan. The balance of the CD in excess of the loan balance was returned to
Hovell.
On June 30, 2016, after alleged unsuccessful efforts to recover funds
from KP Music in a separate lawsuit, Hovell, acting through her agent and
attorney in fact, Holladay, filed a petition for damages against Origin.
Hovell argued in her petition that because Origin liquidated her CD, she was
subrogated to the rights of Origin against KP Music, and because Origin
breached its commitment to acquire additional collateral to secure the loan,
she suffered damages. The petition included copies of the bill of sale from
Holladay Broadcasting to KP Music, the two promissory notes from KP
4 Music to Origin, the assignments of deposit account from Hovell to Origin
to secure the promissory notes, and the certificate of deposit from Hovell.
There was no reference to any independent due diligence by Hovell or
Holladay regarding the creditworthiness of KP Music or its members.
Further, there is no proof of any other security agreements or personal
guaranties Hovell required from KP Music or its members that would inure
in her favor should her funds be seized to pay the loan from Origin.
Apparently, Hovell was satisfied to rely on any security interests and rights
to which she may be subrogated, should Origin utilize her funds to pay the
loan of KP Music. There is no indication Hovell required, prior to pledging
the CD, any proof of the completion of any of the additional security
measures that she claims Origin agreed to collect.
On December 17, 2018, in response to the action initiated by Hovell,
Origin filed peremptory exceptions of no right of action, no cause of action,
and, in the alternative, prescription. It asserted that Holladay had supplied
the funding for the CD in Hovell’s name and had used Hovell as a “straw
man” to circumvent FCC regulations, which, as noted above, prohibit a
seller from retaining a reversionary interest in the FCC license in which he
has an ownership interest.2
Origin argued that the Louisiana Credit Agreement Statute (“LCAS”)
barred Hovell’s action because there was no written agreement to obtain
additional collateral. Any added security would have been in excess of
100% of the loan amount secured by the CD held by Origin, and would then
2 See 47 C.F.R. § 73.1150. Any potential repercussions for such actions relative to FCC rules are not before this Court and pose no legal impact in the present matter, other than serving as evidence of possible motivations for the actions of some of the parties.
5 likely only inure to the benefit of a subrogated party, as Origin was
completely secured with a certificate of deposit equal to its loan amount.
Hovell and Holladay then filed a motion to substitute Holladay as the
plaintiff. The motion was granted, and Hovell was dismissed as a party in
any capacity. Holladay filed a supplemental and amended petition for
damages, claiming that “at the time these proceedings were originally filed,
Hovell was acting as an agent for an undisclosed principal, who was
Holladay, and the monies represented by that certain Certificate of Deposit
dated March 28, 2011, . . . belonged to Holladay.” Hovell states that she had
previously filed suit against KP Music in another proceeding but asserts that
because Origin did not acquire the other collateral, she (and now Holladay)
was damaged because there was no additional collateral to recover in
satisfaction of the debt.
On March 22, 2019, Origin filed a reconventional demand against
Hovell, which made additional allegations about the nature of the loans and
collateral involved between the parties, including that a former employee of
Holladay Broadcasting, Kathy Landrum, originally pledged a CD as
collateral for the KP Music loan. According to Origin, Landrum was
Holladay’s girlfriend and, as with Hovell, Holladay was the true source of
those original funds as well.
On July 11, 2019, a hearing was held and the exception of no cause of
action was submitted on briefs. On July 26, 2019, Holladay filed his
memorandum in opposition to the exception of no cause of action. Holladay
contended that the assignments of the deposit accounts, giving the CD in
6 pledge, satisfied the writing requirement of La. R.S. 6:1122.3 He also stated
that even if those documents did not satisfy the writing requirement, Origin
still owed him the obligation of good faith and fair dealing under the
Louisiana Civil Code. He contended that because Origin knew that Hovell
was acting as an agent for Holladay, it had a duty to inquire about the nature
of the agency and determine whether the agent had authority for the
transaction on behalf of the principal, particularly where a loan contract was
concerned. He acknowledged that Hovell was notified of the loan
delinquency and that money would be taken from the CD to satisfy the debt.
He asserted that the Bank should have notified him, whom it knew to be the
principal, of the loan default instead of Hovell.
Origin maintained in its reply brief that the LCAS precludes all
actions for damages arising from oral credit agreements regardless of the
legal theory asserted. Origin argued that, in effect, if an agreement is not in
writing, then it is not enforceable.
On October 28, 2019, the trial court issued a judgment finding that the
exception of no right of action was moot; the exception of prescription was
referred to the merits; the exception of no cause of action regarding Hovell
was granted, dismissing all her claims with prejudice; and the exception of
no cause of action regarding Holladay was also granted, dismissing all his
claims with prejudice. By footnote, the trial court stated there was no need
for delay for further amendment because “no curative” amendment could be
3 La R.S. 6:1122 states: A debtor shall not maintain an action on a credit agreement unless the agreement is in writing, expresses consideration, sets forth the relevant terms and conditions, and is signed by the creditor and the debtor.
7 made, given the absence of a writing upon which the suit was based. In
response to the judgment, Holladay filed this appeal.
PLAINTIFF’S ASSIGNMENT OF ERROR
Holladay asserts one assignment of error:
In dismissing Holladay’s claim(s) against Origin Bank F/K/A Community Bank Trust by granting the Bank’s Exception of No Cause of Action, the trial court erred by not considering the Bank’s failure to fulfill its duty of good faith and fair dealing that it owed to Holladay.
STANDARD OF REVIEW
Whether a petition states a cause of action is a question of law, and,
on appeal, a judgment sustaining an exception of no cause of action is
subject to a de novo standard of review. Hardy v. Easterling, 47,950 (La.
App. 2 Cir. 04/10/13), 113 So. 3d 1178.
DISCUSSION
By his assignment of error, Holladay contends that Origin knew of the
agency-principal relationship that existed between himself and Hovell, owed
him the obligation of good faith and fair dealing, and breached that duty.4
Holladay argues that the obligation of good faith and fair dealing required
Origin to notify him of KP Music’s default, rather than simply notifying
Hovell. Holladay further asserts that Origin had a duty to use the other
sources of collateral before seizing the CD.
Origin essentially argues that, without a written agreement, it owed no
duty to Holladay. Origin disputes Holladay’s claims that it knew that Hovell
4 Holladay acknowledges in his brief that the LCAS prevents the finding of a fiduciary duty between a bank and its customer absent a writing specifically providing for such a duty. His brief does not address the argument that the assignments of accounts constituted a written agreement between the parties, giving rise to a fiduciary duty, and as such, we do not address this argument.
8 was acting as Holladay’s agent at the time of the assignments of the CD in
2011. It denies that its exceptions contained any admission that it knew, in
2011, that Hovell was Holladay’s agent. Origin points out that the motion to
substitute Holladay as the plaintiff states that Hovell was acting as an agent
for an undisclosed principal.
Further, Origin maintains that it makes no difference whether it knew
of the agency because it did not owe a fiduciary duty to Hovell or Holladay
due to the lack of a written agreement required by La. R.S. 6:1124.5 It urges
that there was no written agreement to obtain other collateral for the loan or
to notify Holladay of the default, and thus, Origin owed no duty to Holladay.
The peremptory exception of no cause of action, set forth in La.
C.C.P. art. 927(A)(5), tests the legal sufficiency of the petition by
determining whether the law affords a remedy on the facts alleged. The
exception is triable on the face of the petition alone, and all facts pled in the
petition, or shown in any documents annexed thereto, must be accepted as
true. La. C.C.P. arts. 931 and 853. An exception of no cause of action
5 La. R.S. 6:1124 states:
No financial institution or officer or employee thereof shall be deemed or implied to be acting as a fiduciary, or have a fiduciary obligation or responsibility to its customers or to third parties other than shareholders of the institution, unless there is a written agency or trust agreement under which the financial institution specifically agrees to act and perform in the capacity of a fiduciary. The fiduciary responsibility and liability of a financial institution or any officer or employee thereof shall be limited solely to performance under such a contract and shall not extend beyond the scope thereof. Any claim for breach of a fiduciary responsibility of a financial institution or any officer or employee thereof may only be asserted within one year of the first occurrence thereof. This Section is not limited to credit agreements and shall apply to all types of relationships to which a financial institution may be a party.
9 should be granted only when it appears beyond doubt that the plaintiff can
prove no set of facts in support of any claim that would entitle him to relief.
Agrifund, LLC v. Radar Ridge Planting Co., Inc., 19-1528 (La. 11/25/19),
283 So. 3d 492. The threshold to overcome an exception of no cause of
action is easily surmounted with clearly worded pleadings which set forth
any cause of action. Such an accomplishment is not necessarily an
indication of ultimate success when genuine issue of material facts and
higher legal burdens are to be considered.
If the petition states a cause of action on any ground or portion of the
demand, the exception should generally be overruled. Every reasonable
interpretation must be accorded the language used in the petition in favor of
maintaining its sufficiency and affording the plaintiff the opportunity of
presenting evidence at trial. Id. Considering the above, this Court must
determine if, at this moment and on this record, it appears beyond doubt that
Holladay can prove no set of facts in support of the claim that he was
entitled to a duty of good faith and fair dealing by Origin and that Origin
breached that duty.
Generally, Louisiana law governing obligations provides that good
faith shall govern the conduct of parties in whatever pertains to the
obligation, and all contracts in Louisiana must be performed in good faith.
La. C.C. art. 1759; La. C.C. art.1983. Louisiana does not recognize a
separate and distinct obligation of good faith, the breach of which would be
equivalent to a breach of the contract between the parties. Favrot v. Favrot,
10-0986 (La. App. 4 Cir. 02/09/11), 68 So. 3d 1099, 1107, writ denied, 11-
0636 (La. 05/06/11), 62 So. 3d 127. The performance of an obligation or
10 contract can be characterized as being in good faith or bad faith, but the
party alleging bad faith performance must first allege facts revealing the
duty to perform an obligation. Gulf Coast Bank and Trust Co. v. Warren,
12-1570 (La. App. 4 Cir. 09/18/13), 125 So. 3d 1211, 1219.
This Court has recognized that the absence of a written fiduciary
agreement does not foreclose the finding of a duty by a bank. Simmons,
Morris & Carroll, LLC v. Capital One, N.A., 49,005 (La. App. 2 Cir.
06/27/14), 144 So. 3d 1207. The legislature, in enacting La. R.S. 6:1124,
“did not intend to totally immunize banks from all legal duties in their
relationship with customers and third parties.” BizCapital Bus. & Indus.
Dev. Corp. v. Union Planters Corp., 03-2208 (La. App. 4 Cir. 09/08/04),
884 So. 2d 623, 627, writs denied, 04-2473, -2502, (La. 01/14/05), 889 So.
2d 267, 268. The legislative history of La. R.S. 6:1124 specifically notes
that it is not intended to eliminate the obligation of good faith and fair
dealing afforded by the Civil Code. Gulf Coast Hous. & Dev. v. Capital
One, 16-0296 (La. App. 4 Cir. 10/05/16), 203 So. 3d 366, 370 (quoting
Minutes, House Commerce Committee, 1991 Reg. Sess., May 15, 1991, at
12-13).
Despite Origin’s arguments to the contrary, the breach of an
obligation of good faith and fair dealing by a bank that has a duty to perform
an obligation to its customers or third parties is a cause of action recognized
by Louisiana jurisprudence. The fact that Holladay may have been an
undisclosed principal of Hovell does not preclude him from potentially
having a cause of action against Origin. A person who contracts with the
agent of an undisclosed principal, when the agent intended to contract on
11 behalf of the principal within his power to bind the principal, is generally
liable to the principal. Woodlawn Park Ltd. Partnership v. Doster Const.
Co., Inc., 623 So. 2d 645, 647 (La. 09/03/93). An undisclosed principal,
upon the revealing of his identity, has the right to bring suit to enforce the
contract directly against the party who contracted with his agent. Id.
Further, whether or not the bank knew of Holladay’s agency relationship
with Hovell is a fact greatly in contention between the parties.
Here, Holladay has alleged facts, which this Court is required to
accept as true, that indicate a complex banking relationship between KP
Music, Holladay, Hovell, and Origin. Holladay alleges that Origin verbally
agreed to secure additional collateral to support KP Music’s loan and that
the bank was aware that the CD provided by Hovell actually belonged to
Holladay. The various pleadings in this matter are unclear as to what Origin
knew about these transactions and the parties involved in them.
This Court is not convinced, beyond doubt, that Holladay can prove
no set of facts in support of any claim that would entitle him to relief. While
this Court is concerned with the efforts undertaken by Holladay to
camouflage his role and involvement in the banking transaction and
potentially circumvent FCC rules, we must look to the plain wording
contained in the pleadings in reaching our decision. The Court is also aware
of the fact that at least one of the security interests Holladay asserts is
missing is his own personal guarantee. Holladay appears to be asserting he
was unaware that he had not executed a personal guaranty to Origin prior to
authorizing Hovell to pledge the CD with his money. Any further inquiry
into these matters is left to the trial court, as it must unravel Holladay’s
12 claim that he is somehow damaged by his inability to bring an action against
himself to enforce his personal guaranty, which he asserts Origin verbally
agreed to obtain but failed to do so.
This Court is charged with making every reasonable interpretation of
the language of the petitions in favor of maintaining its sufficiency and
affording the plaintiff the opportunity of presenting evidence at trial. As the
Louisiana Supreme Court recently confirmed, an exception of no cause of
action should be granted only when it appears beyond doubt that the plaintiff
can prove no set of facts in support of any claim that would entitle him to
relief. A cause of action for breach of a duty of good faith and fair dealing
by a bank to its customers or third parties exists under Louisiana
jurisprudence, and Holladay has satisfied the relatively low threshold of
having made sufficient factual allegations in his pleadings that, if proven
true, could afford him relief.
CONCLUSION
For the foregoing reasons, the judgment of the trial court is reversed
and remanded for further proceedings. Origin Bank, F/K/A Community
Trust Bank, is to pay all costs.
REVERSED AND REMANDED.